People's Democracy

(Weekly Organ of the Communist Party of India
(Marxist)

Vol. XXXIII

No.
29

July
19, 2009

WASTED
LARGESSE

C
P Chandrasekhar

IF
the Sensex is an indicator of corporate
sentiment, even if not of corporate performance, then union budget
2009-10 has
received the thumbs down from big business in India.
The Sensex fell by 870
points (or 5.8 per cent) on budget day, rose marginally the day after,
only to
fall by a further 400 points on the subsequent day. It is indeed true
that
market sentiments do not reflect in full the judgment of industry,
being driven
by whimsical expectations, fears and speculative urges. But, statements
from
corporate leaders do suggest that a fair sample among them is not too
happy or is
downright unhappy with the budget.

This
is indeed surprising because the Finance minister
was quite clear of the need to support the private sector when he said:
“Private sector investment has been affected by the global
macroeconomic
conditions. Our government is committed to creating a facilitating
environment
in which a competitive private sector can thrive and play its rightful
role in
the nation’s economic development. India ’s high growth of 8.5
per
cent per annum from 2004 to 2008 was fuelled in very large part by
private
investment. I look forward to working closely with industry and our
vibrant
entrepreneurial community to address their outstanding concerns.”

MAJOR TAX
CONCESSIONS

TO CORPORATE
SECTOR

This
perspective was reflected in his tax
proposals as well. Despite the need to finance a burgeoning fiscal
deficit, the
Finance minister has imposed no additional taxation on the corporate
sector other
than raising the minimum alternate tax (MAT) from 10 to 15 per cent.
This hurts
only a few firms. The government’s own figures show that the average
effective
tax rate in financial year 2007-08 on 4,10,451 firms that had submitted
tax
returns electronically by March 31, 2009 exceeded 22 per cent and
averaged
20.14 to 24.04 per cent in different profit classes. Even though this
is well
short of the normal corporate tax rate (inclusive of surcharge and
cess) of
33.99 per cent, it is well above the new level for the MAT. That is, on
average,
firms in the government’s sample are in an effective tax rate range
above the
new MAT rate.

There
are a large number of firms (1,61,916 to
be precise) that pay zero or less than zero taxes. But these are
largely
companies that make losses. Their share in the total profits of all
sample
companies is less than 2 per cent, even though they constitute 40 per
cent of
the sample in terms of number. There are, however, 16 per cent of firms
accounting for 45 per cent of sample firm profits that were subject to
an
effective tax rate of 0-20 per cent in 2007-08. It is a few of these
firms falling
in the 0-15 per cent effective tax rate range that would be affected.
It could
hardly be argued that the fate of this set of firms influenced
corporate
sentiment substantially.

More
so because the corporate sector has got a
whole host of other benefits from the budget. If we exclude MAT, the
corporate
sector has indeed obtained a bonanza. For example, the Finance minister
has chosen
to extend for one more year (till 2010-11) the deduction from taxable
income of
the export profits of STPI units, and units in SEZs, EPZs and FTZs.
This tax
holiday was originally available till 2008-09 and was then extended to
cover
2009-10. The major beneficiaries of this concession are the software
development agencies and the IT-enabled service providers/business
process
outsourcing units, in whose case the effective tax rates are as low as
12 and
15 per cent respectively. Revenue forgone under this head in 2008-09
was Rs
20,366 crore. Overall corporate tax concessions have meant that the
revenue
foregone by the government stood at Rs 68,914 crore in 2008-09, which
was Rs
6,715 crore higher than in 2007-08. This increase was greater than the
Rs 6,375
crore increase in the fiscal deficit between these two years.

Another
major tax concession offered to firms in
this budget is the abolition of the fringe benefit tax (FBT). Besides
the
accounting scrutiny which firms were subjected to so as to assess
whether they
were complying with this form of taxation, the FBT was also a major
burden on
the corporate sector. In 2008-09, the sample of companies for which
data are
reported in the Annex on “Revenue foregone under the Central tax
system” to the
budget documents paid as much as Rs 6,553 as fringe benefit tax. This
too was
close to the increase in the fiscal deficit between 2007-08 and
2008-09. By
abolishing FBT the Finance minister has foregone revenue of around this
magnitude, since taxes on perquisites paid by individuals is unlikely
to be
anywhere near this amount.

Budgetary
support for the corporate sector came
in other forms as well. The Finance minister has chosen to continue
with the
temporary excise duty exemptions granted in the stimulus packages
announced in
December 2008 and February 2009. The effective excise duty rates were
cut
across the board by 4 percentage points on December 7, 2008. Later, on
February
24, 2009, the mean excise duty rate of 10 per cent was further reduced
by 2
percentage points from 10 per cent to 8 per cent. These changes were
responsible for a significant share of the increase in excise revenues
foregone
from Rs 87,468 crore in 2007-08 to Rs 1,28,293 crore in 2008-09. With
the
budget refraining from raising the excise duties back to their earlier
levels,
the revenue foregone in 2009-10 would be substantially larger. To the
extent
that the corporate sector does not pass on the benefits of the excise
duty
reduction to the consumer, it will garner a part of the revenue
foregone. And
to the extent that it does pass it on, it may spur demand for private
sector
products. In sum, revenues have been foregone in the budget to support
the
corporate sector in the midst of the recession.

Besides
these benefits given to industry through
measures such as tax concession on investments made by the National
Pension
Scheme Trust in equity and the abolition of the commodities transaction
tax,
the government has provided support to stock and commodity trading
which would
benefit financial capital operating in these markets. Thus, from a tax
point of
view private capital of all kinds should be happy with this budget.

PRIVATISATION
COUCHED

IN POPULIST
RHETORIC

What
then accounts for the corporate sector’s
muted or even adverse response to the budget? An important factor here
is that
corporate expectations of concessions and reforms in this year’s budget
were
exaggerated for two reasons. The first was the idea promoted by the
media and
interested financial analysts and encouraged by the government that a
much
clearer mandate for the Congress, a more stable government and the
absence of
the Left in the equations of power had pave the way for a new
generation of
reforms, which would include more privatisation, more liberalisation
and more
concessions for the corporate sector.

The
second was that this view was strongly
supported by the tone and content of the Economic
Survey presented prior to this budget. To quote the Survey: “The
reforms of
the 1990s created a competitive environment in which Indian
entrepreneurship
could flourish. The fruits of these reforms emerged gradually in the
form of
rising output and employment and higher growth from 2003-04 onwards.
However,
there is a perception among financial and other investors that
government has been
slow on policy reforms, in the past five years. As long as economic
growth was
above trend these apprehensions did not matter, but an economy where
the
industrial (manufacturing) growth has been steadily declining for
nearly eight
quarters over 2007-08 and 2008-09 with the revival still uncertain,
policy interventions
are necessary. More so the sector has been one of the main drivers of
the
recent spurt in GDP growth.” Accompanying this statement is a box that
details
measures required for “improving the investment environment and driving
growth”
which reads like a manifesto for accelerated reform. It is quite likely
that such
reform advocacy in a pre-budget government document encouraged
financial
investors to rush to market.

However,
compared with the Survey’s advocacy,
the reform moves in the budget appear to be a major retreat. Consider
privatisation, for example. It comes couched in populist rhetoric. The
Finance minister
begins by saying: “The public sector undertakings are the wealth of the
nation,
and part of this wealth should rest in the hands of the people. While
retaining
at least 51 per cent government equity in our enterprises, I propose to
encourage people’s participation in our disinvestment programme.” He
then goes
on to elaborate as follows: “The average public float in Indian listed
companies is less than 15 per cent.Deep
non-manipulable markets require larger and diversified public
shareholdings.This requirement should
be uniformly applied to the private sector as well as listed public
sector
companies.I propose to raise, in a
phased manner, the threshold for non-promoter public shareholding for
all
listed companies.”

This
is indeed a case for disinvestment and
privatisation. But in language that is cautious. It came along with a
rather limited
programme for garnering resources through privatisation in the budget.
The
signals were clearly mixed. Those who had rushed to market misled by
the media
and the Survey rushed out, and the stock market collapsed. The
corporate sector
that might otherwise have been happy that it had retained old
concessions and
garnered new ones, was left disappointed. The Finance minister’s
largesse was
wasted.